Buying The Perfect Vacation Home
Scott Reeves, 04.21.05

Owning a vacation home is no longer an impossible dream, but there are basic steps that must be taken to prevent the dream from becoming a financial nightmare.

Pencil out the finances before you close the deal, because if buying your vacation home is a stretch, it will kill the fun of your getaway. And don't count on rental income to cover the entire cost of your vacation home.

Many lenders require buyers to put down at least 20% on a second home, and some require 25% or more. Renting out a vacation home is a good way to cover some of the cost, but lenders often factor in a 25% vacancy rate when determining your qualification for the loan.

The lesson is clear: Don't be overly optimistic on rental income--and you're nuts if you think the vacation home will pay for itself immediately and in perpetuity. A vacation home can be just about self-sustaining, but it takes careful planning and hard work. You shouldn't buy a second home on the assumption that it will pay for itself.

You'll also have to decide what type of property you want: a house or a condo. The beauty of a condo is that routine maintenance is included in the association fees, so you won't have to hire anyone to cut the grass or make routine repairs.

EscapeHomes.com of San Francisco listed the top ten second-home markets in February 2005 as:

1. Myrtle Beach, S.C.
2. South Padre Island, Tex.
3. Naples, Fla.
4. Holden Beach, N.C.
5. Ocean City, N.J.
6. Las Vegas, Nev.
7. San Diego, Calif.
8. Park City, Utah
9. Orlando, Fla.
10. Santa Fe, N.M.

When researching an area, balance current price with expected appreciation, and ask a basic question: Are you buying at or near the top? If you're priced out of a hot market, take a look at up-and-coming areas.

Baby Boomers are now nearing retirement age and are driving the market for second homes insane. A review of 2003 census data by the National Association of Realtors (NAR) found 43.8 million second homes, including 37.2 million investment homes and 6.6 million vacation homes. There are about 72.1 million owner-occupied homes in the U.S.

"Because the typical second-home buyer is a baby boomer, it's likely over the next decade that second-home sales will remain historically high," says David Lereah, chief economist for the Chicago-based trade association.

The NAR says 23% of all homes purchased in 2004 were for investment purposes, and another 13% were vacation homes.

Second home sales totaled 2.82 million last year, up from 2.42 million, or about 16%, in 2003. Sales of investment homes totaled 1.8 million, up about 14% from 1.57 million in 2003. And the sales of vacation homes rose to 1.02 million, up almost 20% from the 850,000 sold in 2003.